The author Peter Philipps came up with a most appropriate “riddle,” as he calls it. “What can be divided exactly in half and still yield two unequal parts?” The answer: marital property!
Financial planners and consultants have their work cut out for them when advising a divorcing couple. They try to ease the strain of a situation that is difficult at best. All too often, however, one spouse or the other seeks financial counsel “after” court proceedings have ended and discovers that one or the other–or both–feel like the riddle above.
The financial problem historically has been more difficult for women than for men. Statistics show that, in general, men’s standard of living improves after divorce, whereas for women it can take a significant nosedive, especially for women with children to raise. This is caused by such considerations as missing child support payments, less money to maintain a household, planning for the children’s education on a single income, and the need to generate income without formal training for a well-paying job.
Additionally, women generally have not had the benefit of financial planning; are underinsured, especially after divorce; and, without financial planning assistance, will probably outlive their income. The financial advisor must therefore concentrate on those vehicles and on planning strategies that will allow them to take maximum advantage of the resources available, whether they be for a struggling divorcee or a high net worth survivor.
Prior to getting a divorce, there are so many questions for both men and women that should be addressed but quite often aren’t, instead getting lost in the emotion of the event. They deal with such critical rights as:
o Insurance (various).
o Settlement of property & strategies (including qualified domestic relations order).
o Visitation and custody of children.
o Debt (credit cards).
o Child support.
o Retirement benefits.
o Common property.
o Tax issues.
There are undoubtedly many other considerations, but these are the most common. Whether or not a divorce is expected, it causes much financial strain and emotional stress. However, with careful planning and the assistance of a good professional, equitable goal setting for financial stability for both is certainly possible.
Men as well as women need the proper tools for the survival of divorce. After fully understanding the definition of the big “D” word, getting started is imperative. Learning what to expect if a trial is part of the proceedings is vital. If mediation is not feasible, one can still avoid appearing in court if the 2 attorneys can get an agreement between the 2 parties (assuming the individuals involved are unable to negotiate on their own, which is too frequently the case, owing to high emotions).
Divorce is, unfortunately, a reality, and it is repeated millions of times each year. Even with the best efforts, marriages dissolve. Not being aware of important information is also a reality, but like any other area, ignorance is no excuse. There are key tasks that require the divorcing couple’s attention (see chart).
Choices regarding property division and alimony/child support are irreversible, so the spouses might want to confer with a professional to make sure they don’t make decisions they’ll later regret.
In many instances, men may be worried about how the divorce will affect their relationship with the children. If they are not given as much time as they believe is appropriate to spend with their children, the emotional part may be extremely stressful. However, the financial stress is felt by both the children and the father.
In these situations, assuring that the children are properly taken care of through child support and educational costs is critical. This is where financial consultants, planners and insurance professionals can assist in helping prepare for the future of our “leaders of the future.” Making sure adequate coverage or protection for these young individuals is important, regardless of whether the parents are together or not.
Insurance is an important part of the final settlement. Health protection for everyone is necessary and needs to be addressed, but life insurance should not be eliminated. Life insurance can enable a spouse to compromise if the income is not large enough to accommodate adequate child support and/or alimony payments.
A fair face value should be determined and be left with the children (if there are any) or former spouse as beneficiaries. The fact that the parents are divorcing does not mean, after all, that the children no longer have that parent, and children are generally not properly prepared for in this regard.
The dissolution of property is probably the largest and most fought overarea in a divorce. This includes material items and financial assets brought into the marriage and accumulated afterwards. And if the issues regarding Social Security, taxes and credit card debt aren’t enough, there is always the issue of learning all about lawyers!
One key factor to consider when dividing marital property is to not overlook the future earning potential of both parties concerned. There must be enough to factor in keeping up with living expenses (inflation) and the types of investments owned by each. One may have a situation that is quite satisfactory initially or just after the divorce but will not continue to grow fast enough to keep pace with future living expenses.
Assuming the divorce has been finalized, let’s consider one option in the case of a female who has been left with a high net worth. There are still other important issues to be addressed, financially speaking. Example: underestimating long-term needs and tax liabilities. If this individual has real estate in addition to liquid assets, one vehicle for managing highly appreciated assets as a result of rising property values is a tool called a charitable remainder trust (CRT).
A variety of personal and charitable objectives can be achieved if this trust is properly structured. As an illustration, this divorced individual now owns a piece of property that has escalated in value and needs to be converted into an income-producing vehicle; the property also has to avoid capital gains taxes and provide an income stream for life.
A client who chooses this trust can make a future gift to a qualified charity and possibly qualify for a generous and current income tax deduction while retaining an income interest in the trust, thereby avoiding capital gains taxes. Because charities are the remaindermen, the client receives an income tax reduction upon transferring assets to the trust. Also, the CRT is a tax-exempt entity, so it doesn’t pay taxes on any gain realized when it sells assets or on its other income.
Another vehicle available to the high net worth client is a fixed lifetime income annuity, a tax-deferred investment with multiple benefits. Income payments, which are based on the annuitant’s lifetime expectancy, will continue for the life of the annuitant. And if the cash refund option is chosen initially, should the annuitant pass away before all of the assets are disbursed, the beneficiary will receive the balance of the account. If, however, the annuitant has a long life span, he or she will be guaranteed this income stream for life, even if it exceeds the initial single deposit.
Besides the fixed option with this program, there is a variable option as well that might be attractive to the high net worth individual who can tolerate the additional risk. This could aid one in receiving slightly more in a monthly income should the market do well, but conversely, if the market goes down, the payments could be less.
A point worth noting is that a mix of the fixed and variable options can be combined in one program and in any percentage of each if desired. While annuities are an asset in most portfolios, they entail investment risk, including possible loss of principal. The fixed option, however, may eliminate some of the risk, the only potential negative being the claims-paying ability of the company or issuer.
Getting professional help in the investment and insurance area is just as important as getting a good attorney. Representation in the financial arena is so important when you are looking at the long-term outlook. An overall divorce proposal, just as in preparing for your retirement as a couple, is necessary when preparing for divorce. It can decrease bitterness and have more positive results, especially in categories where everyone’s happiness and well-being are at stake.
Charles Ghigna, nationally syndicated feature writer, once made a profound, yet amusing, observation: “Money’s never mentioned when speaking of romance, but say the word “divorce” and you’re talking high finance!”